In a decision issued this week in City of LaCrosse v. Wisconsin Dep’t of Revenue and Gundersen Clinic, Ltd. (Gundersen Clinic)1, the Wisconsin Tax Appeals Commission (Commission) ruled that the following categories of computerized medical equipment are exempt from property tax:
- Ultrasound equipment
- Magnetic resonance imaging (MRI) equipment
- Radiation oncology and linear accelerator equipment
- Laser equipment
- Cardiology equipment
- Nuclear medicine equipment
- Digital imaging equipment
- Diagnostic equipment
Owners or lessees of such medical equipment located in Wisconsin, as well as owners or lessees of other computerized equipment in Wisconsin that is currently treated as taxable, should take immediate steps to claim the exemption.
Statutory Exemption of Computer Equipment
The ruling in Gundersen Clinic is based on the Commission’s application of Wis. Stat. § 70.11(39), which exempts from property tax “mainframe computers, minicomputers, personal computers, networked personal computers, … electronic peripheral equipment, tape drives, [and] printers.” The exemption does not apply to “fax machines [that are also copiers]2, copiers, equipment with embedded computerized components or telephone systems.”
The Commission also considered the Computer Exemption Guidelines (Guidelines) published by the Wisconsin Department of Revenue as part of the Wisconsin Property Assessors Manual. The Guidelines state with respect to medical devices that “certain electronic imaging and monitoring devices” are exempt if they are “computer or electronic peripheral equipment” and cite as examples of exempt medical devices “ultrasound imaging device, magnetic resonance imaging device (MRI), and computerized axial tomography.” The Guidelines state that X-Ray imaging equipment, on the other hand, is taxable because it is “not a computer or connected to and operated by a computer.”
The Gundersen Clinic Ruling
In the Gundersen Clinic case, Gundersen Clinic, Ltd., (Taxpayer) reported the above categories of medical equipment as exempt in its personal property statements for the years at issue. The assessor for the City of LaCrosse (City) reclassified all but ultrasound and MRI equipment as taxable. The Taxpayer objected to the reclassification and the State Board of Assessors ruled for the Taxpayer. The City appealed to the Commission and the Taxpayer intervened. On appeal, the City argued that all of the categories of medical devices, including the ultrasound and MRI equipment the City itself had exempted, were taxable.
Both the City and the Taxpayer designated expert witnesses. The City’s expert was a medical physicist with expertise in the application of the medical equipment at issue but with no experience in computer engineering or design. The Taxpayer’s expert was a biomedical engineer with 25 years of experience designing and building electronic devices for use in medical research. The City’s expert testified at deposition that based upon definitions from common-use dictionaries, and disregarding the Guidelines, in his opinion all of the medical devices were “embedded computerized components,” a taxable category under § 70.11(39). The Taxpayer’s expert opined that the medical devices consisted of servers, personal computers, and electronic peripheral devices, all of which are exempt categories under the statute.
The Taxpayer moved for summary judgment, arguing that its medical devices were exempt under the plain language of the statute and Guidelines because in each case, the device consisted of both a computer (either a personal computer or server) and electronic peripheral devices, i.e. devices connected to and operated by a computer. The Taxpayer further argued that the City’s expert lacked relevant expertise; that his broad interpretation of “embedded computerized components” was impermissible because it obliterated the distinction between the mutually exclusive exempt and taxable categories in the statute; and that, as a matter of law, his testimony could not satisfy the City’s burden of proof. The Commission agreed and granted summary judgment in the Taxpayer’s favor. The Commission explicitly ruled that the Guidelines are authoritative because they do not conflict with § 70.11(39), but rather give effect to the statute by further defining the distinctions between the exempt and taxable categories it establishes.
Implications for Exemption of Other Computerized Equipment
Although the Gundersen Clinic case specifically addresses computerized medical equipment, it may have much broader implications. The Wisconsin Department of Revenue’s Guidelines apply Wis. Stat. § 70.11(39) to more than 40 different categories of electronic equipment. By recognizing the Guidelines as authoritative, the Commission has fortified the argument that other types of electronic equipment the Guidelines categorize as exempt, but which tax assessors currently treat as taxable, indeed are entitled to the exemption.
For example, another important category of electronic equipment for which the application of § 70.11(39) and the Guidelines are currently being litigated is multifunction document processing equipment that combines a computer server, scanner, printer, and fax capabilities (MFDs). The Guidelines categorize such “all-in-one printer/scanner/fax/copier” devices, i.e. “combination devices that include an exempt device,” as exempt electronic peripherals if they can only operate using a computer. In Xerox Corp. v. Wis. Dep’t of Revenue,3(Xerox), the evidence established that the MFDs at issue included exempt devices, i.e. servers, printers, and other electronic peripheral equipment, and could only operate using computers. The commissioner who conducted the evidentiary hearing and witnessed the equipment demonstration proposed findings of fact that favored the taxpayer. That commissioner retired before issuing a decision, however, and the deciding commissioners declined to adopt his proposed factual findings. The deciding commissioners held that the MFDs were not exempt, reasoning that it is not sufficient to “contain” an exempt device and that the computers in the MFDs were not “external.”
The Commission’s holding in Xerox is suspect both because of the unique procedural history of the case, and because the decision appears to contradict the explicit language in Gundersen Clinic recognizing the Guidelines as authoritative. Xerox is currently pending on appeal before the Wisconsin Court of Appeals, Case No. 2007AP2884. Taxpayers who own or lease MFDs in Wisconsin therefore should consider claiming an exemption to preserve their rights pending a final decision in Xerox.
Claiming the Exemption
Regardless of whether computerized equipment is state assessed (i.e. owned or leased by manufacturers) or locally assessed, objections to the assessment of such equipment are filed with the State Board of Assessors, not with the local board of review. The deadline for filing a computer objection is 60 days from the date of the assessment notice, which is longer than the typical time to file a board of review objection.
Many Wisconsin municipalities already have issued their 2008 assessment notices and others will do so in the coming weeks. Taxpayers whose computerized equipment currently is assessed should act promptly and file objections to preserve their rights.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information to our tax and employee benefits clients and colleagues. If you have any questions about or would like to discuss this topic further, please contact your Foley attorney or any of the following individuals:
Maureen A. McGinnity
Erik G. Weidig
Theresa A. Andre
Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.